Banks, leaders play down Dubai debt threat

 

DUBAI/LONDON: Banks outside the Gulf played down their exposure to Dubai debt yesterday after fears of default shook global markets, and European leaders said the world economy was now strong enough to cope with the setback.

Stocks from Tokyo to New York were haunted by concern that banks were exposed to state companies in Dubai.

The crisis began on Wednesday when Dubai, part of the United Arab Emirates federation, asked to delay payment on billions of dollars of debt issued by conglomerate Dubai World and its main property subsidiary Nakheel, developer of three palm shaped islands that once attracted celebrities and the super-rich.

"While it is a setback, I think we will find it is not on the scale of previous problems we have dealt with," British Prime Minister Brown told reporters in Port of Spain.

"The world financial system is stronger now and able to deal with the problems that arise."

French Prime Minister Francois Fillon said the Gulf had the resources to ensure the world would not sink into a second round of turmoil, but Russian premier Vladimir Putin said the saga showed how hard it is to shake off a crisis that has lasted two years.

Dubai World had US$59 billion (US$1 = RM3.38) of liabilities as of August, most of Dubai's total debt of US$80 billion. International banks' exposure related to Dubai World could reach US$12 billion in syndicated and bilateral loans, banking sources told Thomson Reuters LPC.

But the numbers pale in comparison to the US$2.8 trillion in writedowns the International Monetary Fund estimates US and European lenders will have made between 2007 and 2010.

Analysts expect Dubai to receive financial support from Abu Dhabi. But the prospect of a bailout did little to allay concerns among investors, already worried the global economy may not be recovering quickly enough to justify a near doubling of prices for emerging market stocks and many commodities since March.

Wall Street, which was closed on Thursday for the US Thanksgiving holiday, stumbled yesterday. The Dow Jones Industrial Average was down 112.16 points, or 1.07 per cent, to 10,352.24 at 1615 GMT.

Banks with Gulf investors were badly hit, with Citigroup down over 3 per cent.

European and Asian banks scrambled to distance themselves from problems in the Gulf trade and tourism hub, helping European stocks reverse earlier losses and hit session highs as the market reassessed the significance of Dubai's problems.

Earlier, banks and builders bore the brunt of selling pressure across Asia as investors fretted that exposure to Dubai could further squeeze profits already hit by the global economic downturn.

Shares of leading banks including HSBC Holdings and Standard Chartered tumbled 7-8 per cent, and property developers such as Australia's Leighton Holdings, and Japan's Obayashi Corp were dumped on fears of losses from some of Dubai's extravagant construction projects.

"Within banking specifically, the biggest exposure appears to be with Standard Chartered and, secondly, with HSBC, followed by DBS," said Daniel Tabbush, Asia banks analyst at CLSA in Bangkok.

Few of Asia's big banks would comment on their exposure, with most saying they did not talk publicly about loans to specific clients.

Standard Chartered said in a statement it was aware of its disclosure obligations and would make a statement in the event it had anything material to disclose.

Goldman Sachs said its initial worst-case loss estimates were US$611 million for HSBC and US$177 million for Standard Chartered.

An official for HSBC declined to comment. The London-based bank may have assets of around US$9.7 billion in Dubai, Singapore's DBS has estimated.

No one at DBS was immediatedly available for comment on the bank's own exposure, and its shares were untraded due to a market holiday.

Australia's Westpac said it had little financial exposure to Dubai World and expected no material loss. Other Australian banks, Macquarie Group, Australia and New Zealand Banking Corp and National Australia Bank Ltd, said they had no material exposure to Dubai.

Taiwan's fourth-ranked Mega Financial said it had exposure to Dubai World loans and was trying to find out how much.

"We are very concerned about the situation," Grace Lin, an executive vice president, said by phone. "We heard some other Taiwan banks also have exposure."

In South Korea, the Financial Supervisory Service has said the country's financial institutions' exposure to Dubai was just US$88 million, but shares in KB Financial, Shinhan Financial Group and Woori Finance Holdings all fell by around 4 per cent. - Reuters, AFP